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Why Steel Stocks Are Crashing Today

What happened

U.S. stock markets are continuing the declines seen in Europe overnight. While the major U.S. market indexes are experiencing general declines of 2% to 3%, steel stocks are showing outsized drops. United States Steel (NYSE: X), ArcelorMittal (NYSE: MT) and Cleveland-Cliffs (NYSE: CLF) are all down about 10% today.

So what

Some European countries are seeing a new rise in COVID-19 cases, and the spread is expected to expand further, according to Reuters. "Countries like Spain have infection dynamics that are likely out of control," said German health minister Jens Spahn. Analysts are predicting this will lead to more restrictions to contain the spread, with negative economic impacts. Any hit to global economic recoveries will likely stifle the recent rebounds seen in basic materials industries like steel.

Image source: Getty Images.

Last week, United States Steel said it was seeing strengthening business fundamentals and that "improving market conditions experienced in June and July have accelerated through August and September," when it provided better-than-expected third-quarter guidance. Other steelmakers including Nucor (NYSE: NUE) and Steel Dynamics (NASDAQ: STLD) also provided upbeat third-quarter estimates recently, and shares in both are also down close to 10% today.

Now what

ArcellorMittal is the largest global steelmaker with manufacturing operations in 18 countries, and is based in Europe. Any new COVID-19-related lockdowns that may be needed to fight the spread of the virus will directly impact its business.

Cleveland-Cliffs completed its acquisition of AK Steel in March 2020, bringing it a large exposure to North America's automotive industry. North American steelmakers, including AK and United States Steel, have been announcing price increases as demand from the economic recovery has progressed. Any hit to growing demand will likely not allow the companies to realize those higher sales prices.

It's critical for that pricing to hold, especially for highly leveraged companies like AK, United States Steel, and ArcelorMittal. In June, United States Steel announced a stock offering and AK announced a debt issuance. Growth projects have been put on hold awaiting improving business conditions.

Predictions of a second wave of COVID-19 in Europe, and perhaps in other parts of the world, have investors tapping the brakes on steel stocks today after recent gains driven by previously improving conditions.

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Howard Smith owns shares of Nucor. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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